Tangled Webs and Executive Naivete

Amit S. Mukherjee is a professor of leadership and strategy at IMD’s Singapore campus. He has led technology development teams, served as an executive officer of a public company, and advised CEOs of global companies on strategy and organization design.

Leaders in a digital world have to navigate more complexity than ever before. This demand on their role requires them to avoid believing they are omniscient, to seek broader — rather than deeper — knowledge, and to be clear about their strategic intent.

Complexity in a situation increases when many interconnected factors influence each other. Digital technologies create complexity by distributing work over time and across geography. Multiple non-colocated teams, groups, and companies collaborate without necessarily knowing how, why, or how much the content of their work (such as “design of the dashboard”) or the attendant conditions (“must be delivered on …”) affects others.

For example, in the auto industry, over 40% of a typical car is designed, and over 70% manufactured, by companies whose names consumers don’t ever see. Each organization executes its own tasks, expecting the company whose name is on the car to oversee the big picture. This assumption may not hold because the relevant big-picture information simply may not exist. This happens when novel intellectual property with many unknowns is created, or when people are drowning under overflowing in-boxes, or when blind spots exist in available information because no one has acquired information that, in hindsight, was crucial. Conversely, the company whose name is on the branded product may expect its suppliers and other key partners to inform it of anything that requires attention. That assumption too, may be optimistic: Many times, partners have contractual incentives to not disclose bad news early.

This example doesn’t imply the car doesn’t get built. Were that the case, companies would abandon distributed work in a heartbeat. What it does imply is that a problem that arises in one node of such networked work can spread easily, with widespread adverse impact. It is easy to find auto industry stories of small problems that have, can, or will, spread and threaten global production. Moreover, such problems have existed since early in the digital age (and have sometimes become full-fledged crises).

Complexity-Induced Problems Often Have Similar Fundamental Causes

While each instance of a problem that arises because of complexity appears to be novel, the collection of complexity-created problems — when shorn of their idiosyncratic factors — has three primary causes:

The problems are inherent in the network. Efforts to stop problems from spreading by one path usually result in their taking other, unanticipated paths. Good leaders understand that addressing a problem’s idiosyncratic factors — including ineffective management at a node of the network — won’t protect the network. While ineffective management can exacerbate problems, crises can occur even if every leader is effective.

During the 2007-2008 fiscal crisis, for example, the U.S. Federal Reserve and the Obama administration tried to arrange the rescue of weak institutions sequentially. Each time they saved one institution, another fell. The much-criticized bailouts finally tackled two issues simultaneously: They shored up multiple institutions that would otherwise have fallen like dominoes, and they created buffers at stronger institutions that would have been weakened.

Complexity conceals what is happening, how, and why, from leaders. Digital technologies are making work more thought driven than muscle powered. Even if we set aside deliberate concealment, needed information may be buried in intellectual properties like code, models, and trade secrets, and in people’s heads. Even worse, people aren’t great at documenting their rationale for specific actions, and are terrible at documenting their rationale for not taking specific actions. That leaves leaders struggling to make sense of complex situations — particularly when the issues involved cross business unit or company boundaries, or sharp linguistic and cultural ones.

Again, the financial crisis offers an example: Because of incomplete knowledge, some of which was attributable to well-meaning pre-digital era laws, many major financial institutions had invested in both sides of failing transactions. They had unknowingly created lose-lose conditions for themselves.

Complexity challenges the human mind. Psychologists have shown that people find it difficult to simultaneously consider the collective impact of more than a handful of interconnected factors. They rely on simple — even simplistic — models of reality that may not account for all key issues. Classifying the auto industry problems as those of “supply chain management” is this kind of simplification. Supply chains are key, but product development, marketing, finance, human resources, and legal and tax issues play critically important roles, too. Classifying the fiscal crisis as one born simply of greed and deceit is another simplification. Greed and deceit abounded, but they did not bring down the world’s economy in many other situations. Simple and simplistic models make it easy to point the fingers of blame and accountability, but they discourage consideration of a situation’s overall complexity.

How to Manage Complexity: Three Ways Forward

Despite the costs of complexity, digitally enabled corporate networks won’t go away. They offer far too many benefits in today’s world. Artificial intelligence will, in time, undoubtedly help, since computers are far more effective at dealing with complexity than people are. Even then, though, the issue of how to lead people will remain. So we must consider how leaders can ameliorate the effects of complexity. Aspirants to leadership should adopt the following three recommendations, noting that each assumes (and requires) the one prior:

Develop broader, not just deeper, perspectives. Business executives with expertise in one area in which they have built their careers are often unprepared to deal with complexity. At least some of the factors that interact to produce complexity are unappreciated or not well understood. Thoughtful executives recognize this lesson every time a crisis occurs — the initial diagnoses are inevitably simplistic compared to the full accounting that emerges later — but forget its warning under the pressure of everyday work.

Learn to think in terms of scenarios and simulations. Most human events do not follow a single line from cause to effect. Psychologist and Nobel laureate for economics Daniel Kahneman points out that humans are abysmally poor at thinking in probabilistic terms, and most cause-effect relations they perceive immediately after something happens are false artifacts of their minds.

Executives should learn to consider multiple possibilities that could explain a set of empirically observed facts. Moreover, they should make the consideration of “what ifs” routine in decision-making. In complex situations, they might then not jump at the easiest solutions.

Be clear about strategic intent. Gary Hamel and C. K. Prahalad, coauthors of Competing for the Future (Harvard Business Review Press, 1994) coined the term “strategic intent” to explain why Japanese multinationals succeeded without having strategies. Among other things, their leaders eschewed strategies (everyone implements a leader’s will) and instead provided guideposts that gave coherence to the diverse actions of their subordinates.

Complexity in a digital world demands a similar approach. Leaders who specify the intended speed and direction of motion give others the flexibility to respond to local conditions without imperiling the overall effort. Leaders themselves can then focus their own energies without becoming bottlenecks, or getting pulled in multiple directions.